Could A Change In Business Model Win Designers A Place In The C-Suite?

Yves Behar is one of the most successful designers working today. But that success owes a great deal to the novel venture model he created, investing in the clients whom he works for.

Yves Behar, and the design firm he founded, Fuseproject, always seem to be in the news with some new product or another. You’d assume it’s simply because the firm is talented and brilliant at marketing. Both are true. But their secret ingredient isn’t some kind of creative fairy dust. Rather, it’s a simple facet of their business strategy: Where most design firms work for a fee and then part ways with their client, Fuseproject usually focuses on work with startups and takes an equity stake in whatever they work on. "I truly believe that’s the future of design," says Behar. "The traditional consulting model is broken."

Actually, the traditional consulting model probably works just fine in many contexts. But as Behar points out, the problems facing new businesses have changed. Just a decade ago, entrepreneurs setting out to create companies weren’t usually expected to start their own brands from scratch. Brands were simply too hard and too expensive to create. But since then, expectations have risen as the startup field has grown crowded. It’s not enough to stand out with a single idea—as examples ranging from Mint.com to Jawbone have shown, you’ve got to combine it with a great product, a great UI, and a voice that sets it apart from a litany of competitors.

Production values and fine-grained details, which used to be the last things that entrepreneurs would have to worry about, are now vital to their success from the very moment of inception—and they can often be the lure that attracts all-important venture backing as a company grows.

[One of Fuseproject’s first equity successes: Jawbone, for which they continue to work.]

Creating a brand, of course, isn’t a project with a beginning, middle, and end. There are myriad decisions to be made over time, and it requires constant vigilance—if the creative leadership changes, it’s all too easy for the message to drift. "You can’t do good work on a short-term contract," says Behar. "You need to be engaged over a period of time."

Here, Behar is echoing something that the great Dieter Rams told us: Companies who have made their mark on design usually did so because a single designer had an unusually strong relationship with the company’s founder. Rams pointed to his own relationship with Braun’s CEO. Nowadays, of course, the crowning example is Apple, and the symbiotic mind meld that Jony Ive had with Steve Jobs.

Behar’s point is that you can’t simply recreate that chemistry in other businesses. There has to be a mechanism that accords the designer a role that fades in and out as they’re hired for projects. They have to have a stake, and the risk that they’re taking should be rewarded. Otherwise, designers can be relegated to the role played by Yves Behar himself. Fuseproject played a seminal role in the creation of the Slingbox—not only did they design the first product, they also named it and branded it. But they were merely consultants, and when the company was sold three years later for $380 million, well, that had to sting a bit. Behar remains good friends with Slingbox’s founder, Blake Krikorian, who expressed regret that Fuseproject’s earnings didn’t reflect their role. Behar, of course, realized that he needed a different way of working instead of constantly churning clients to generate more fees.

At this point, Fuseproject has co-invested with 18 startups. Out of those, he says that there are three or four that haven’t worked out but remain alive. But more than five are throwing off significant cash. In fact, Behar reckons that nearly 60% of Fuseproject’s revenues come from their entrepreneurship model—and 80% of their profits. That sort of track record rivals almost any venture capital fund. The key, Behar says, is that Fuseproject chooses only two or three venture projects per year. And these are chosen not just because the client is eager for design services. The change in business model changes how they look at clients. "We look for companies and situations where we can create a lot of value," says Behar. Spoken like a true VC.

Fuse does some nice design. So do many of the designers I have been lucky enough to work with. No one -- no one -- I know well does less of a good job because they lack an equity stake in their client. Seriously. No dis to fuse PR, but I don't think that fuse tried less because it didn't have a stake in Sling Media. And newdeal did a great job on the subsequent Sling design, but it had no stake in the company either. Both were trying to define the brand and make a tangible, lasting statement in the client's market. This is even evidenced in the fact that newdeal didn't completely abandon the original cues fuse started (although i am glad that ndd ditched the attempt at text patterns as venting).

Designers with a good knowledge of product development and may be little of business development definitely have a chance to rub shoulders with VCs. It's all about being able to harm yourself with the secondary stuff.

In spite of the fact that I am not wearing a scarf, I cannot stop myself from commenting. I respect much of Mr. Behar's work, but at the same time agree with many of the comments received. The article gives one the impression that he discovered or invented the idea of royalty. This is simply not true.

I design for the contract furniture industry which for decades has paid royalties. Fee based project do happen at times, but seem rare. I have been in the industry for approximately 30 years and for quite sometime my income has been 100% royalty based. I also know other designers who have operated with this "Behar Model" for decades.

I do not wear scarfs, white suits or Le Corbusier eye glass frames. I just do good design. I love doing it and my clients, all have become great friends, love it too. The work at times receives awards, but the true reward is the process itself and watching the client smile.

There are many of us designers able to connect with CEOs and build great business models with royalty - mutually beneficial arrangements where everyone has skin in the game is in the long run a much more viable business model. This is just Moneyball for design - the numbers sound good but it doesn't win the World Series.

Well, Alex, that is the reality out there in media in general and not unique to FC. That tip of the iceberg, its size tends to optically grow as it is hyped by media, which in turn drives readers, which in turn drive ads revenue, and so on and so on in a "closed hype loop". Fuseproject is a great design firm in my opinion and well deserved a lot of the publicity, but there are other ridiculous examples out there I know personally where people with very undistinguished added value have managed to get into that loop and generate a lot of business for themselves. Much of the hype actually came from very reputable magazines.

Are we going to find another design posterboy anytime soon? This one is getting a little too much fluffing from FastCo for my tastes. Much like IDEO was for business week a few years back... C'mon guys -- there are many firms executing permutations of this kind of model for many years as several other folks have pointed out. There are so many good firms out there. Spread the love a bit. Starting to seem a bit intellectually lazy to me.

This is not a new model. I have managed a design consultancy for 14 years and in my early years I took on a number of equity projects in lieu of fees. Most of these projects have fizzled to nothing leaving me with a cash flow shortfall in the years that I pursued these. This is partly my own fault in allowing myself to be swept up in grand plans of global domination by inexperienced entrepreneurs. One of them has potential for significant return but I have been waiting 8 years for this potential to be realised and until the company achieves a trade sale which is part of the exit strategy, there is no real value in my equity stake.

Private equity shares are difficult to trade or sell and are not recognised as an asset by a bank, so potential is all you have, it doesn't pay the rent and wages or allow you to borrow against it.

I have taken on another project on a royalty/sales commission arrangement and this does "throw off cash' on a monthly basis. After two years in start up, I will be in a position this year, where I break even to where I would have been had I charged a standard fee for the work and hopefully start to reap the extra profit from my investment.

Designers need to be careful choosing the client that they work with on this no fee basis. There are many entrepreneurs that prey on naivety and I have learned through experience to see through the BS and take a realistic view on income forecast spreadsheets that have a large number at the end with way too many zero's. there are many aspects to successful commercialisation that have nothing to do with how good the design is. The client's business experience in a start up is important along with their capacity for management, production, marketing, distribution and most importantly finance. If they can't afford to pay your design fees, how are they going to manage the rest of the business start up and commercialisation process that will probably be ten times the cost of your fees.

Behar has got it right here... the next step is to apply it to micro-ventures like those on Kickstarter and IndieGoGo. Without experience guiding them, these guys get into big trouble really quickly and they're generally cash poor (but revenue generating), so they're less likely to spend the money on consultants.

What Behar is really doing here is "skin in the game" mentorship and it's sorely needed in the crowd-funded world.

I share the optimism of others, but more careful with the enthusiasm. I've been a FC subscriber since it was founded, and it has always been enjoyable thought stimulating platform, but it has not been a reliable trend indicator. I never expected it to be nor should it be one because that would almost be an oxymoron and I hope it would stay that way. It is unique. For reliability I read the Economist, etc. Now FC also emphasizes design, which happens to be fine with me too, and is quit a natural thing to do given all of the above. I'm saying all of that because I like to emphasize again that what we see in fusroject (assuming no hyporbele which FC by its nature is more usceptible to) may very well be just the tip (success) of the iceberg and all the failures are the vast majority that is under the water. It is often the case in business, even in business academia, that analyzing the visible leads to erroneous conclusions, sometimes fads and sometime lingering beliefs that are unfounded. This business model is not at all new and there are many successes, but it is not necessarily a reliable one, a sustainable trend, and designers need to be very careful and educated about all it's aspects before starting acting. The same rules of entrepreneurship and portfolio management (strategic financial risk management) and business savvy hold, and let's not get carried away thinking that design thinking can beat conventional business (VC) thinking as I suspect Fuseproject's metrics are. Finally a reminder to those who complain about design driven to commodity. I share the pain, and so do so many in the Western economies and world-wide, engineers, marketers, and just about everyone. Supply and demand rules will continue to hold, but we designers will continue to innovate and move the point where the curves intersect. Let's just not get carried away while enjoying reading FC and business sources in general. I suspect that most designer need to continue to seek happiness in what they do and enjoy best and not measure their success by financials like those of the visible tip. Cheers.

Very well put Shimon, both regarding FC and about balancing the facts and not getting to exhagerated about the conclusions of this article.

The ID agency I work at has had the same business model as this one, One out of ten VC projects has paid out. Often the need for help and service are often the greatest and most critical amongst those clients that can't front the cash to get it done. You often end up spending the double or triple amount of hours put in to it as was intended in the first place.

For a specialist engaging in a start-up in this way, there are a lot of things that is out of your control in determining if the project is going to be a success. Their price strategy, distribution, marketing skills, competitors dumping their price and so on. The hardest part of the business is getting paid premium for the specialist value you contribute with. Up front.

I've long felt that design companies don't get a fair reward for the value that they bring. It is difficult to quantify the value of design but we can measure the cost, which is what we end up competing on.

Yes there are some challenges to be overcome, change always comes with challenges, but they are by no means insurmountable. Even for a traditional agency to invest some time in diversifying its revenue model would be a sound business strategy.

Imagine what agency life would be like if we could get off our addiction to short term cash. This is one of the most exciting trends in our industry today. I'm looking forward to the future.

Before everyone gets all excited by this "new" business model I have to point out that, based on this report, a few things really do not add up. If Fuse is taking equity in startups (their claim) then there is no cash flow until there is an exit - and there haven't been any. And they are most likely discounting their fees to get the equity - any smart entrepreneur with a well funded startup (the successful ones) would demand the discount. The only way to "throw off significant cash" the arrangement would have to be a royalty deal - most of Behar's clients haven't been around long enough to generate the sales required at create s"significant cash" flow at standard royalty rates. So where is all this money coming from? And if "two or three deals a year" represent 60% of his revenue he must be working for his other clients (dozens if you believe the Fuse website) at cost. So which is it - equity or royalty - and does his profit model account for the discounts to his traditional fees? I'd have to see a lot more detail to believe that this isn't just more PR from a firm well know for hyperbole.